Tax debate at risk over probe debacle

Last week’s economic news was all positive for the administration: GDP grew faster than expected, employment metrics were all pointing in the right direction and stock markets all rallied to record highs after corporate earnings went from strength to strength.

Much of that political ballast could be lost this week after Robert Mueller’s probe into alleged ties between Russia and the Trump campaign resulted in former Trump campaign chairman Paul Manafort and campaign official Rick Gates receiving indictments for counts including money laundering, making false statements to federal authorities and, most ominously, conspiracy against the United States.

While the indictments themselves aren’t necessarily surprising (and hence haven’t wavered the dollar significantly), this marks the first step in what could be a much broader and wider-reaching investigation.

The dollar’s gains since Trump’s appointment have been due to hopes of lower business taxes fueling both dollar repatriation and the US economy and the longer these investigations clog up the White House’s timetable, the less time Trump can lobby for his flagship policy.

Catalonia has become an even bigger problem for Spain

Catalonia, finally, declared independence from the Spanish state last week, triggering waves of celebrations and counter protest on Saturday and Sunday. The central Spanish government has wasted no time in starting provisions under Article 155 that counter this independence claim, including the deposition of Carles Puidgemont, the Catalan leader, his parliament and the head of the Catalan police force. Elections have also been called and must take place before December 21st. While the independence declaration was made, a number of countries including the UK, USA and the wider European Union have stated they will not recognise Catalan independence at this point in time.

Initial polls suggest that the pro-independence lobby would lose their majority although there is a lot of road to travel and hurdles to jump until Catalan voters go to the polls. An early election would prove to be positive for the EUR as it has been marked down heavily since the ECB meeting on Thursday.

More volatility for the kiwi

The kiwi dollar’s continued to crunch lower following the new administration’s calls for the mandate of the RBNZ to change in a way that may mean lower interest rates. Finance Minister Robertson told reporters that “what it means is that when the Reserve Bank is making its decisions about the official cash rate, when it’s thinking about monetary policy, of course it thinks about managing and controlling inflation, and that’s vital. But also it thinks about other goals in the economy such as making sure that we maximise employment.”

A change in the mandate would undermine the main reason for holding the NZD; the amount of ‘carry’ that investors receive from holding the kiwi dollar would likely fall as monetary policy loosened. Unemployment is only 4.8% in New Zealand and that is close to what is considered to be a Natural Rate of Unemployment (NRU) in an economy. The issue in New Zealand is much like the issue here; higher employment, stagnant wages and poor productivity. This is more an issue for government than a central bank.

The day ahead

It’s a typically quiet Monday for the economic calendar, but politics will be at the forefront of all news outlets (financial or otherwise) for the time being.

With a background in economics, fundamental and technical market analysis, Edward Hardy works with World First’s Economics and Currency Strategy team to assist and advise clients on transactional FX strategy and currency solutions. Over the course of the EU Referendum, Edward and team have advised clients large and small on the use of structured hedging products to help secure returns and accelerate performance.